Most clients spend in dollars, not in returns. The bucket strategy gives them dollars to spend without forcing us to sell stocks at the wrong time. Each sleeve is a tool — this guide explains what each one does, how they behave, and when to reach for each.
We map sleeves to time — short bonds for near-term spending, longer bonds for the years after that, equity for the decades after that. The further out in time, the more growth, the more volatility we can tolerate.
Holds the first 24 months of client spending. The job is preservation and same-day liquidity, not return. We pick between VBIL and DUSB based on state tax.
| VBIL | Vanguard 0–3 Mo Treasury Bill ETF | Taxable + state income tax |
| DUSB | Dimensional Ultrashort Fixed Inc ETF | No state tax OR tax-deferred |
VBIL holds nothing but US Treasury bills, so the interest is exempt from state income tax. That matters in CA, NY, NJ, HI, MN, MA, OR — the high-tax states. In a no-state-tax state (FL, TX, TN, etc.), the exemption is worthless and DUSB's slightly broader holdings give marginally better yield. Inside an IRA, taxes don't matter, so DUSB by default.
Reinvestment risk, not price risk. Ultra-short doesn't move much when rates change — that's the point. The risk is the opposite: when Fed cuts rates, the yield drops within weeks. A client expecting "high cash yields forever" will be disappointed when the Fed eases. Set that expectation up front.
Once we have 24 months in ultra short, we extend duration slightly to pick up yield. 75% in DFSD for total return, 25% in DFIP for inflation protection.
| Ticker | Fund | Weight |
|---|---|---|
| DFSD | Dimensional Short-Duration Fixed Inc ETF | 75% |
| DFIP | Dimensional Inflation-Protected Sec ETF | 25% |
DFSD is the workhorse — short-duration high-quality bonds. Pays a real yield with modest interest rate risk. If rates rise 1%, DFSD drops ~2%; if rates fall 1%, DFSD gains ~2%. Holds investment-grade corporates and Treasuries.
DFIP is the inflation hedge. TIPS principal adjusts with CPI, so they protect real purchasing power. They have longer duration (~6.5 years) which adds rate sensitivity — but the inflation accrual offsets the rate risk most of the time. 25% gives the sleeve a built-in inflation defense without overweighting duration.
Rate shock. 2022 is the textbook example: the Fed hiked aggressively, short bonds lost ~3–5%. The client sees a negative number on a statement and panics. Pre-empt this: explain duration up front, and that holding to the sleeve's effective horizon recovers the loss through higher coupon reinvestment.
TIPS confusion. Clients see DFIP down in a deflationary scare (early 2020) or when real yields spike. TIPS aren't a deflation hedge — they're a real-yield instrument. Frame DFIP as a long-term inflation defender, not a short-term insurance policy.
For clients who want extra defense beyond the first four years. Sleeve length is a function of risk tolerance: a conservative retiree might extend it through year 15 or 20, while a more equity-tolerant client might skip it entirely. Two active managers blended with one core passive holding. Lives in tax-deferred accounts by default.
| Ticker | Fund | Weight |
|---|---|---|
| DFCF | Dimensional Core Fixed Income ETF | 50% |
| BINC | iShares Flexible Income Active ETF | 25% |
| PYLD | PIMCO Multisector Bond Active ETF | 25% |
DFCF (50%) is the passive anchor — Dimensional's core fixed income exposure, diversified across investment-grade credit and Treasuries. Low cost, broad exposure, predictable behavior.
BINC (25%) is Rick Rieder's flexible-income strategy at BlackRock. Can go anywhere in fixed income — high yield, EM debt, securitized — to find income. We use it for diversification beyond core US investment grade.
PYLD (25%) is PIMCO's multi-sector flagship. Long pedigree, deep credit research, active duration management. The blend with BINC gives us two different active perspectives.
The default mental model is "years 5–8," but that's a starting point, not a rule. The sleeve length should reflect how much equity volatility the client can stomach in years 5–10. Three reference points:
Conservative retiree (e.g., 75-year-old widow, modest portfolio). Extend intermediate to year 15 or 20. That's 11+ years of spending in duration-matched bonds before equity takes over. The portfolio drag from being heavier in bonds is the price of behavioral durability.
Standard retiree (60s, balanced risk tolerance). 4–8 years of intermediate. Covers years 5–12 of spending. Equity grows undisturbed in years 1–4 and recovers if drawn down in year 9+.
Equity-tolerant client (50s, still working, long horizon). Often zero intermediate. The short sleeve is enough — equity does the heavy lifting beyond year 4.
Short duration is hard for active managers to beat passive — credit spreads are tight, the universe is constrained, fees eat any alpha. Intermediate is where active can earn its keep: sector rotation, credit selection, duration calls. We pair the passive DFCF with BINC and PYLD to get the best of both — low-cost beta plus active risk-adjusted return potential.
Duration drawdown. 2022 saw the Bloomberg Aggregate lose ~13%. Intermediate funds with 5–7 year duration moved similarly. If the Fed has to hike fast, this sleeve hurts. Client expectation: "this sleeve can lose 10% in a bad year — but it's there to fund years 5–8 of spending, not next month's mortgage."
Credit drawdown. BINC and PYLD can dip into below-investment-grade. In a credit event (think March 2020), they can underperform. Don't position them as bond-like — position them as managed credit allocations.
Eleven Dimensional ETFs blended to capture global equity returns with tilts toward value, profitability, and small-cap. This is the part of the portfolio that funds spending in year 9 and beyond — and grows the estate.
DFUS at 39% is the core — broad US equity market exposure. The next two holdings (DUHP, DFLV) add Dimensional's two factor tilts: high profitability and value. Those tilts are why we're not just buying VTI.
International: DFIC core + DIHP profitability tilt + DISV small-cap value tilt. About 23% combined. We're underweight EAFE relative to global market cap on purpose.
Emerging markets: DFEM core + DEHP profitability + DFEV value. About 8% combined. Diversification benefit, especially against US-dominant portfolios.
Real estate: DFGR at 2%. Modest position for diversification and inflation sensitivity. Not a yield play.
Drawdown. Global equity can lose 30–40% in a bear market. The whole point of the bucket strategy is that we don't have to sell this sleeve during those drawdowns — the short sleeves fund spending while equity recovers. If a client is going to panic during a 30% drawdown, the sleeves don't help them — we need to size the fixed income sleeves bigger up front.
Factor underperformance. Value and profitability tilts can lag the broad market for years (2010s growth boom is the recent example). Document the philosophy in the IPS. We're not chasing — we're tilting toward factors with multi-decade evidence of premium.
What 11 funds blend out to. The portfolio is anchored in US large-cap, but the factor tilts produce meaningful overweights in international, emerging markets, small-cap, and value vs. a passive global market-cap index.
Every bond has two numbers — its price and its yield. They move in opposite directions, always. When new advisors internalize the seesaw, the rest of fixed income gets easier. Move the slider and watch the bar tilt.
Four things move yields. Once you understand these, you can predict why a bond is moving when rates are doing something unusual.
The Fed sets the short end of the yield curve directly through the federal funds rate. When the Fed hikes, ultra-short and short bond yields move within days. The long end moves too, but with more independence — long rates also reflect inflation expectations and growth.
The Fed's tools are not just the funds rate — quantitative tightening (selling Treasuries from its balance sheet) pushes long yields up too. QE (buying them) pushes yields down.
Nominal bonds compete with inflation. If investors expect 3% inflation over the next 10 years, they demand a higher yield to compensate. Rising inflation expectations push yields up and prices down — without the Fed doing anything.
This is why TIPS exist. TIPS quote a "real yield" — the yield over and above CPI. When inflation expectations rise, nominal Treasury yields go up but TIPS real yields stay flat, so TIPS outperform nominals.
Corporate, high yield, and securitized bonds yield more than Treasuries — the gap is the "credit spread," compensation for default risk. When the economy looks shaky, spreads widen (corporates fall in price even if Treasuries don't move). When growth is steady, spreads tighten and corporates outperform.
Credit spreads matter for everything beyond pure Treasuries. DFSD has some credit. DFCF has more. BINC and PYLD can have a lot. Two different bond funds can both have 5-year duration but very different return profiles if their credit exposure differs.
Bonds are auctions. When the Treasury sells more bonds than buyers want, yields rise to clear the market. When foreign central banks buy heavily (Japan, China historically), yields fall. When a big institutional seller dumps a position, the specific bond's price drops independent of the rate environment.
This is less important for diversified ETF holders day-to-day but matters enormously in stress, when normal buyers retreat. The next section covers what happens then.
If a client holds DFSD to the sleeve's horizon (years 3–4), a temporary price drop reverses as the fund's holdings mature and proceeds get reinvested at higher yields. The mark-to-market loss is real, but it isn't permanent unless they sell.
"Bond funds don't have a maturity date, but they do have a duration. Hold for at least the duration and the math works out."Imagine a seesaw with the pivot at the fund's duration. When rates move, today's price moves down (or up), but future income moves up (or down). The longer the duration, the bigger the swing in both directions — but the slower the offset.
Short duration: small swings, quick reset. Long duration: big swings, slow reset.In normal markets, bond funds trade smoothly near fair value. In stress, that breaks. Understanding when and why is the difference between holding through a panic and selling at the worst possible moment.
Every fund we use is exchange-traded with daily liquidity. A $5M sale of DFCF settles in T+1. None of our holdings have lockups, gates, or redemption windows.
The risk isn't "can I get money out" — it's "what price do I get when I sell." That's the next concept.
All sleeves: T+1 settlement, no lockup.This is where duration shows up. If a client needs to sell DFCF in a year when rates have risen 1%, they sell at a price ~5% below where they bought. That's a real loss — even though the fund is "liquid."
The bucket strategy is the answer to this. Near-term spending sits in low-duration sleeves where the price doesn't move much. We never have to sell intermediate bonds at a bad time.
Match sleeve duration to spending horizon, and price risk goes away.The duration formula — price ≈ −duration × Δyield — assumes a normally functioning market with buyers and sellers near fair value. In stress, that assumption breaks. Three things go wrong at once:
1. Dealer bid-ask spreads widen. Bond markets are dealer-intermediated. In normal times, dealers post tight quotes — buy at 99.95, sell at 100.05. In stress, dealers don't want to hold inventory, so they widen quotes — buy at 98, sell at 102. The "market price" effectively gaps lower for any seller.
2. ETF arbitrage breaks down. Bond ETFs normally trade within pennies of their net asset value because authorized participants arbitrage any gap. When markets are stressed and the underlying bonds are hard to trade, the AP arbitrage breaks. The ETF can trade at a meaningful discount to its NAV — sometimes 3–7% — even though "the bonds inside" haven't moved that much.
3. Forced sellers create cascades. Mutual funds facing redemptions, banks managing capital requirements, and leveraged players hitting margin calls all sell into the same thin market. This creates price moves that have nothing to do with rates, credit quality, or the actual cash flows of the bonds — they're purely about who needs to sell now.
The implication for our portfolios: the short-bucket sleeves exist so we are never forced to sell intermediate or equity in a stress event. If the bucket strategy works — and a client has 2 years of spending in ultra-short, plus 2 years in short duration — they can wait out a 6–12 month dislocation without locking in a bad price.
Liquidity is the ability to sell. Duration is the price you'll get when you do. In normal markets, the duration formula is enough. In stress, the formula understates losses — sellers also pay a liquidity premium that doesn't appear in any model.
Why we build buckets: the short sleeves remove the obligation to sell. A client never has to take a bad price on intermediate or equity because their spending is already covered by something that hasn't moved.
If a client is retired and pulling income, the order of returns matters as much as the average. A bad year early in retirement is catastrophic if they're selling equity to pay bills. The bucket strategy prevents that.
Both columns above experience the same 10-year average return on equity. The only difference is what gets sold to fund spending. When we spend the short bond sleeve first, equity has time to recover before we touch it. That's worth real money — usually 10–20% more wealth at the end of a decade.
A working reference for matching client situations to sleeves. Most decisions are obvious once you've internalized the architecture — this is for the edge cases.
| Client situation | Primary sleeve | Why |
|---|---|---|
| Client needs $50K for a kitchen reno in 4 months | Ultra short | Short enough horizon that any price movement matters. Park it in VBIL/DUSB and don't take duration risk for 30 bps of yield. |
| Retiree drawing $8K/month indefinitely | Ultra short → short → intermediate | Layer the sleeves. 24 months in ultra short keeps the next 2 years of distributions price-stable. Short and intermediate refill the ultra-short as it draws down. |
| Pre-retiree, 5 years from retirement, working accumulation | Equity-heavy, small ultra short | No income need yet. Keep the cushion for portfolio rebalancing dry powder, but don't drag returns with intermediate bonds the client doesn't need. |
| Client with $2M IRA + $100K taxable, $80K annual need | Asset location matters | Ultra short fits in taxable (better tax outcome on T-bills with state exemption). Short duration can spill into IRA. Intermediate goes in IRA. Equity in Roth + remaining IRA. |
| Client in 35% bracket wants tax-aware allocation | Munis in taxable short | Above 32%, taxable-equivalent yield on muni short almost always wins. Swap DFSD/DFIP in taxable for a national short muni (or in-state muni in CA/NY). |
| Client wants more defense, lower equity | Extend intermediate sleeve | Add intermediate years (4 or 6 instead of 0). This raises fixed income duration without adding ultra-short — gives them more defense without sacrificing yield. |
| Worried about inflation specifically | Tilt to DFIP, hold equity | Already 25% of short duration is in TIPS via DFIP. Don't add more — instead, reinforce that equity is the long-term inflation hedge. TIPS protect 2–3 years; stocks protect 30 years. |
| Client wants "safe" but is 75% equity at the wirehouse | Bigger fixed income sleeves | "Safe" usually means low equity volatility tolerance, not low return. Size income years up (e.g., 6 instead of 4) and add intermediate. Don't add bonds for the sake of bonds — match the duration to the spending plan. |
Measured in years. A 5-year duration fund loses ~5% if rates rise 1%, gains ~5% if rates fall 1%. Different from maturity — duration accounts for the timing of all cash flows, not just when the bond matures.
30-day yield assuming current holdings, current yields, expenses subtracted. Comparable across funds. Use this number, not "distribution yield" — distribution yield can be inflated by return of capital.
For callable bonds, YTW assumes the issuer calls at the worst possible time for the bondholder. The realistic yield estimate when bonds in the portfolio can be called early. Often lower than SEC yield.
Muni yield ÷ (1 − marginal tax rate) = the yield you'd need from a taxable bond to match the muni after tax. Example: 3% muni at 32% federal = 4.41% TEY. If taxable bonds yield less than 4.41%, the muni wins.
TIPS quote real yield directly — it's the spread over CPI. A 2% real yield means the bond earns CPI + 2% nominally. Regular bonds quote nominal yield; their real yield is harder to know in advance.
If a portfolio averages 7% over 30 years but the first three years are -25%, -15%, -10%, a retiree withdrawing 4% annually can run out of money decades early. Same average return, different outcome. The bucket strategy mitigates this.
Video walkthroughs from senior advisors. Watch these in order if you're new to the firm.